Stock Market, ETFs Are No Longer Cheap

May 27th at 7:45am by Tom Lydon

With seasoned stock-pickers like Warren Buffett finding it difficult to select bargains, investors may not find too many cheap investments in the U.S. stock market and exchange traded funds.

In an annual shareholder letter, Warren Buffett argued that he did not repurchase shares of Berkshire Hathaway (NYSE: BRK-A) because it was not cheap enough, reports Michael P. Regan for Bloomberg. BRK-A was trading around 1.38 price-to-book ratio, or higher than the preferred 1.2 ratio Buffett tends to look for.

The book value refers to a company’s total assets minus liabilities.

As the S&P 500 index hovers near its all-time high, about 91% of the index’s components are trading above the 1.2 ratio. The SPDR S&P 500 ETF (NYSEArca: SPY) currently sits around a 2.29 price-to-book ratio. In comparison, on March 9, 2009, almost half of the index traded below the 1.2 ratio.

Some areas of the market tend to show higher valuations, even in bear markets. For instance, investors tend pay a premium for consumer and tech companies where brand names, patents and other assets don’t change hands often.

The Consumer Staples Select Sector SPDR (NYSEArca: XLP) shows a P/B ratio of 3.59 and the Technology Select Sector SPDR (NYSEArca: XLK) has a P/B ratio of 3.17.

Alternatively, investors could look overseas for cheaper investments. For instance, European and emerging market stocks are just beginning to pick up this year after falling behind U.S. equities last year.

For instance, the Vanguard FTSE Europe ETF (NYSEArca: VGK) shows a P/B ratio of 1.73 while the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) has a P/B ratio of 1.29.

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Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own shares of SPY and EEM.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.